Federal mortgage rules implemented two months ago aimed at turning down the heat on Canada's red-hot real estate market took effect on Monday.

In February, Finance Minister Jim Flaherty outlined a slate of new regulations that borrowers and lenders must adhere to qualify for a mortgage in Canada. The rules became law on April 19.

People walk past new homes that are for sale in Oakville, Ont., on Tuesday. Federal mortgage rules implemented two months ago aimed at turning down the heat on Canada's red-hot real estate market took effect Monday. (Nathan Denette/Canadian Press)

Among the rules:

• All borrowers must meet the standards for a five-year, fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term.
• The maximum Canadians can withdraw when refinancing their mortgages drops to 90 per cent of the value of their home, from 95 per cent.
• Buyers must make now a minimum 20 per cent down payment — up from five per cent — to qualify for Canada Mortgage and Housing Corp. insurance for non-owner-occupied properties purchased as an investment.

"There is no evidence of a housing bubble, but we're taking prudent steps today to prevent one," Flaherty said at the time.

The five-year rate requirement is likely to have the greatest impact, as borrowers must now meet more stringent standards and provide more documentation for their income.

Investment property

However, the 20-per-cent minimum down payment rule is less likely to make a significant dent in real estate activity as there are no rules as to where those funds can come from. There is nothing in the rules that would prevent homeowners from withdrawing equity from their primary residences to meet the 20 per cent threshold on a second investment property, for example.

"Creative financing will become increasingly popular," London-area real estate agent Marcus Caporicci said of the new rules.

Ultimately, home buyers will continue to tap their personal credit lines and family connections to get the money they need to enter the housing market, he said — even if a few are jumping in early to avoid tougher lending rules or rising rates.

"What the government wants to do is ensure that people aren't taking on too much debt that they run into problems when rates rise," TD Bank deputy chief economist Craig Alexander said.

"If you're going to invest in real estate, you'll have to put down a minimum of 20 per cent," he said. "That should cool speculation and that's a positive thing."

Torrid pace

Real estate in Canada has been on a torrid pace since late 2009, as would-be buyers rush to take advantage of record low rates amid an improving economy. The average national price last month was $340,920, the Canadian Real Estate Association said last week.

But that pace has slowed of late, Alexander said — sales have been down in four of the last five months as the number of new listings has increased.

"Year-over-year price changes are still up by about 17 per cent, but you're comparing it to recession lows," Alexander said of the most recent sales data. "By the time we get to May and June of this year the year-over-year comparisons are going to look remarkably different."

"The increase in supply is acting to cool the market and that's healthy economics," Alexander said. He expects sales to be roughly 10 per cent lower by the end of 2010, with price gains in the range of one to three per cent.